I am often asked about my opinion on bitcoin and the crypto industry. While it is easy to articulate the answers to specific questions, I’ve recently found it difficult to express my macro view of the industry. That all changed on Friday when I read this tweet by Brandon Quittem.
Brandon explained my view of the industry better than I could. After reading the tweet, here is how I would explain my current framework:
There was a computer science breakthrough in 2008 that solved the double spend problem. That solution (a blockchain) created an inflection point in what was possible in the digital world. Certain attributes like scarcity, immutability, and trust-less transactions could now be applied to all industries.
The creation of blockchain technology has led to two separate revolutions that are under way. One is a monetary revolution and the other is a technology revolution. While these two revolutions share a similar technology, they are very different in nature.
The monetary revolution has manifested itself in bitcoin. This is disruption in the purest form. Fiat currencies lack transparency, have variable monetary policies, are highly unpredictable, and require third parties for transactions. Bitcoin is the exact opposite — fully transparent, with a programmatic monetary policy, completely predictable, and removes the need for a third party. The monetary revolution will be winner take (nearly) all, which means that monetary maximalism is the only natural end state.
The technology revolution has manifested itself in thousands of non-bitcoin crypto assets. There are commodities, equities, and debt.
The identification of two separate revolutions is important because it gives us a framework to discuss the importance of monetary maximalism, while still acknowledging tremendous value accrual to non-monetary assets.
Before we look at the crypto industry, let’s look at the traditional financial system. Investors understand that it wouldn’t make much sense to compare the US dollar to Amazon. They are two different assets. It also wouldn’t make sense to compare Amazon to oil or the US dollar to steel. They are all different types of assets.
The exact same thing is true in the bitcoin and crypto markets. Comparing bitcoin to NFTs doesn’t make a lot of sense. They are two different applications of a technology that are attempting to solve two different problems. The same could be said about comparing Bitcoin’s layer one to any smart contract platform’s layer one blockchain. They are different applications of a technology that are trying to solve different problems.
Let’s dive deeper into each component of this analysis. The monetary revolution is an important one for reasons that we have discussed over the last few years in this letter. We must remember that monetary maximalism is the historical norm, rather than a new idea. US citizens are USD maximalists. European citizens are Euro maximalists. Chinese citizens are Renminbi maximalists. When it comes to currencies, maximalism drives resilience and value.
The same is true for digital currencies as well. The maximalist viewpoint is a product of a market structure that presents outsized reward to the competition winner. As Brandon Quittem said, monetary maximalism is rational. With that said, maximalism is exclusive to the currency category.
The technology revolution has thousands of small teams of entrepreneurs and operators working relentlessly to innovate in various industries. Any level of maximalism, whether from a technology or application perspective, would be highly irrational. The value accrual in this revolution will be similar to the stock, commodity, or debt markets. Thousands of companies accrue value. Thousands of commodities accrue value. And thousands of debt mechanisms accrue value.
Imagine if you were a python maximalist. Or an iOS maximalist. Or an Amazon maximalist. If you picked the right technology or company, you could make money - but you would miss out on the thousands of other assets that also created and captured value. You also would be ignoring the fact that someone can always build faster, cheaper technology. Maximalism in anything but a currency is irrational.
Maximalism is appropriate in currencies. Maximalism is inappropriate in equities, commodities, or debt. Both statements can be true at the same time.
There are still many unanswered questions for those that hold this worldview. What is the proper asset allocation strategy? How should you think of portfolio construction if you’re a pure capitalist who wants to optimize returns? How about if you want to capture an attractive financial gain, while also helping to usher in more good in the world?
The crazy part is that if monetary maximalism ends up playing out how I believe it will, bitcoin will eventually be incredibly stable in value. The price of goods and services will be denominated in bitcoin and the average bitcoin holder won’t see any level of volatility. When this occurs, people will have a choice to simply spend less than they make in an effort to save bitcoin. Or they will be available to invest in other assets to acquire more bitcoin than what they would simply be allowed to save.
As a student of investing and markets, it is hard to see a world where every individual stops investing completely and moves to a saver-only economy. So the more rational outlook is that monetary maximalists will hold the majority of their wealth in a global store of value (bitcoin), while also investing in other opportunities that they believe will help them acquire more bitcoin.
This investment in non-monetary assets will force investors to hold an open mind and ensure no technology maximalism. Innovation happens too quickly to hold a rigid perspective on one non-monetary technology. You can do this with a monetary asset because technological superiority isn’t essential, but you can’t do it with technology assets.
This conversation is hard to have on the internet because it requires the acknowledgement of nuance. You can’t simply say “maximalism is bad!” or “maximalism is good!” You actually have to articulate that both statements are true — it just depends on which revolution you are referring to.
Lastly, my personal focus in recent years has almost exclusively been on bitcoin. The only crypto asset that I hold personally is bitcoin and it makes up 90%+ of my liquid net worth. I’ve made investments in other things, including for-profit private companies, layer two technologies, and even blockchain-agnostic services like insurance or node infrastructure. There is so much opportunity to generate outsized returns in this industry. I still focus on bitcoin though because it isn’t about the money to me. I genuinely believe that bitcoin will usher in a world that creates more freedom, economic prosperity, and opportunity for billions of people around the world.
Just because I focus on one area doesn’t mean that I believe other areas won’t gain value, nor does it mean that I’m actively rooting against those founders, users, communities, or technologies. It just means that I’m following the thing that I’m personally most interested in. When an industry is being created from (basically) scratch, it is impossible for any one investor to be educated on every single sub-vertical. Sometimes knowing where you don’t have an advantage is just as important as knowing where you do.
My guess is that plenty of people will disagree with the framework of monetary maximalism and technology competition. That is fine with me. I’d love to hear the dissenting points of view. Plus, the market is the ultimate referee. If I’m right, I’ll see it in my portfolio. If I’m wrong, I’ll be financially hurt.
That is the beauty of a capitalistic society. I’m excited to see how it plays out. Hope each of you has a great start to your week. I’ll talk to everyone tomorrow.
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